Essential ADV Amendment Tips
Main Contributor: Elizabeth Cope, CPA, CSCP, CIPM, CEO & Lead Consultant
Background
Every Registered Investment Adviser (“RIA”) must file their Annual ADV amendment within 90 days of their fiscal year end. Most advisers have a fiscal year end of December 31st, which means it’s due by March 31st each year (March 30th if we are talking about a leap year). The SEC offers ADV FAQ and the Instructions for Part 1 and Parts 2A/B can actually be very helpful, but they sometimes fail to address challenging and more unique questions. As compliance consultants, we review hundreds of ADVs, and as a result, see common areas where RIAs get caught up in the wording of a question or just aren’t sure how to address the question for their situation. This article is designed to provide you with our insights and tips for some of the more common ADV sticking points.
1. Consistency
A lack of consistency is the most common issue we find in advisers’ regulatory filings. The Form CRS, ADV Part 1, and Part 2A have required responses and disclosures that are consistent among them. It’s important to take the time to cross reference against each document and against your compliance procedures and advisory agreements (particularly around the subject of fee calculations) to ensure consistency.
Further, ensure consistency between the Part 2Bs of your supervised persons and their U4s, where applicable.
2. Item 9.F of the ADV Part 1
Item 9.F asks: “If you or your related persons have custody of client funds or securities, how many persons, including, but not limited to, you and your related persons, act as qualified custodians for your clients in connection with advisory services you provide to clients?”
This word salad is asking you to indicate the number of custodial relationships you have where client assets are custodied and where you are considered to have custody. For purposes of this question, custody will include the ability to have fees directly debited from the custodial accounts (which, by the way, does not require a response to Item 9A and 9B and explains why this question is often not answered correctly).
3. Section 5.K in ADV Part 1
As a reminder, within this section you only answer the questions for your separately managed accounts, which is all of your clients EXCEPT for (if applicable to you) mutual funds, private funds, and business development companies. We have seen advisors mistakenly update to include the excluded client types.
4. Categorization Under Item 5.K(1)
For separately managed accounts, you must categorize, for all clients under your management, the security types held in their portfolios. Mutual funds and exchange traded funds should be counted in row (ix) – Securities Issued by Registered Investment Companies or Business Development Companies. We have commonly seen advisors mistakenly categorize exchange traded funds within row (i) exchange-traded equity securities. If a security type fits in more than one category, use your best judgement to select the category that you think best fits and then keep internal documentation to support your methodology.
5. Sections of Schedule D of ADV Part 1
Don’t forget to comb through Schedule D of your Part 1 to see if further updates are needed. When you complete your annual amendment, the previous year’s response will remain, and you will not get an error on your completeness check. We have seen advisors neglect to update these sections accordingly.
6. Item 5.C(1) of ADV Part 1
Item 5.C (1) asks “To approximately how many clients for whom you do not have regulatory assets under management did you provide investment advisory services during your most recently completed fiscal year?”
Take note that this is asking how many clients you provide advisory services to that are NOT included in your regulatory assets under management. We have seen advisors mistakenly include their entire client count in this category.
Further, if you have clients that fit in this category for Item 5.C(1), you also need to include them in the number of clients column by client type in Item 5.D, but you do not include the assets for those clients in the amount of regulatory assets under management section.
7. For Private Funds: Section 7.B(1).23(g) and (h) of the ADV part 1
Item 23(g) asks “Are the private fund's audited financial statements for the most recently completed fiscal year distributed to the private fund's investors?”
If, by the time you submit your ADV, and the financial statements have not yet been delivered, BUT you have engaged an auditor AND the audited statements WILL be delivered as required, then you may answer YES to this question.
Item 23(h) asks “Do all of the reports prepared by the auditing firm for the private fund since your last annual updating amendment contain unqualified opinions?”
You need to select “report not yet received” in item 23(h) if the financials have NOT yet been delivered to all investors by the time you have submitted the ADV. Then you will need to timely file an other-than-annual amendment once the financials have been distributed. I would recommend setting up a calendar reminder, so you do not forget this step.
8. Item 8.G of the ADV Part 1
Item 8.G specifically asks if the firm receives any “soft dollar benefits,” and if they are eligible “research or brokerage services.” The approach to this question varies amongst advisors. My personal opinion is that the benefits you receive from having a relationship with a broker dealer that are NOT paid for with client commissions would not be considered soft dollars and would warrant a NO response. You should, however, disclose in your ADV Part 2A that you do not have soft dollar arrangements or benefits, but ensure that you describe the additional services you do get from your relationship with that broker-dealer(s). I have seen advisors answer YES even if they don’t have soft dollar arrangements with similar disclosures in their ADV Part 2A, and that is okay as well. The key is having clear disclosures in your ADV Part 2A.
9. The Specific Formatting of Form CRS
Form CRS has very specific formatting instructions that you must pay attention to when creating and updating your Form. Circle back to the instruction to ensure you didn’t miss any of the requirements.
10. Funding the Account
For my last-minute filers, make sure you have enough money in your flex funding account to cover any required fees. It typically takes a day for the funds to hit the account and your ADV cannot be submitted unless those funds have posted. You do not want this to be the reason you were not able to submit timely.
11. Answering for the Advisor and/or Related Persons
Pay attention to the wording on the questions in Part 1. In some cases, they will use the terms “you” and “your” which refers solely to the advisory firm and in other cases the questions will include or ask about related parties, which includes your officers, directors, employees, affiliates, and persons associated in a similar capacity.
12. Attaching the Form CRS and ADV
For some odd reason, the process for uploading the Form CRS is completely different from uploading the ADV brochures. For the Form CRS, you will upload PRIOR to submitting the Form ADV, but you will upload the ADV Part 2A and 2Bs AFTER you submit the Form. Be sure to check “Amend” on Part 2 of the ADV, otherwise you will not be able to upload the ADV Part 2A and 2B. Take note that ADV Part 2B is not required to be filed with your annual amendment, however some do upload it separately or wrap it into their 2A as a Part 2 Brochure.
13. Supporting Records
One of the most important and valuable steps you can take, is to keep documentation to substantiate the data provided in your ADV, including any notes on your conclusions. This not only supports you if you are asked during an SEC exam, but it is also of tremendous help when you are filing the following year. It’s easy to forget your methodology when you only do this once per year.
Naturally, this list is not exhaustive, but these are some of the most common mishaps we have observed advisers make when completing their annual amendments. Don’t forgot to utilize the resources available to you such as the SEC FAQ and ADV Instructions for Part 1 and Parts 2A/B.